Chap 3a: Public Debts

1 In Book 3, I showed that the person who has a large revenue in the rude state of society can enjoy that revenue only by maintaining as many people as possible.

  • A large revenue then might consist in basic necessities such as:
    • plain food
    • coarse clothing
    • corn and cattle
    • wool and raw hides
  • When no commerce or manufactures is available to allow him to exchange his surplus, he can only use it to feed and clothe as many people as possible.
    • In this situation, the main expence of the rich is a hospitality with no luxury.
      • But these expences do not ruin the people.
  • All selfish pleasures, even the most frivolous ones, have ruined even sensible men.
    • A passion for cock-fighting has ruined many.
  • I believe few people have been ruined by a non-luxurious hospitality or liberality.
    • But luxurious hospitality and ostentatious liberality have ruined many.
  • Among our feudal ancestors, the long time during which estates continued in the same family demonstrates the people’s general disposition to live within their income.
    • The great land-holders’ rustic hospitality may seem inconsistent with good economy.
      • However, we must give them credit for not spending all their income.
    • They had an opportunity to sell their wool and raw hides for money.
      • Some of this money they perhaps:
        • spent on the few objects of vanity and luxury
        • hoarded
          • They could do nothing else but hoard the money they saved.
            • Trading was disgraceful to a gentleman.
            • Lending money at interest was considered as usury and prohibited by law.
          • In those violent times, it was convenient to have a hoard of money in case they were driven from their home.
            • The same violence which made it convenient to hoard made it convenient to conceal the hoard.
              • Treasure-trove was treasure which did not have a known owner.
                • Its frequency demonstrates the frequency of hoarding and concealing the board.
                • It was then considered as an important branch of the sovereign’s revenue.
                • Presently, all the kingdom’s treasure-trove would perhaps not make an important part of a very wealthy man’s revenue.

2 Hoarding prevailed in the sovereign and in his subjects.

  • In Book 4, I showed that, the sovereign of nations with little commerce and manufactures is naturally parsimonious.
    • His expence cannot be directed by the vanity in a court’s gaudy finery.
      • The ignorance of the times affords only a few trinkets of that finery.
        • Standing armies are then unnecessary.
    • His expence can be employed only in the:
      • bounty to his tenants
      • hospitality to his retainers
    • But bounty and hospitality very seldom lead to extravagance, though vanity almost always does.
      • All the ancient European sovereigns accordingly had treasures.

3 The sovereign of a commercial country rich with luxury naturally spends much of his revenue buying those luxuries.

  • His own country and its neighbours supply him with costly trinkets for his court’s insignificant pageantry.
    • For a similar pageantry, his nobles:
      • dismiss their retainers
      • free their tenants
      • gradually themselves become as insignificant as the wealthy burghers in his dominions
    • The same frivolous passions which influence their conduct influence the sovereign’s.
  • Why should the sovereign be the only rich man insensible to pleasures?
    • If he does not overspend it on himself, he will likely overspend it on his nobles to support national defense.
      • His ordinary expence thus becomes equal to his ordinary revenue.
      • The amassing of treasure then can no longer be expected.
    • When extraordinary exigencies come, he must call on his subjects for extraordinary aid.
  • The present and the late king of Prussia are the only great European princes who have amassed any big treasure since the death of Henry IV of France in 1610.
  • Parsimony has become rare in republican and monarchical governments.
    • The Italian republics, the United Provinces of the Netherlands, are all in debt.
    • The canton of Berne is the single European republic which has amassed any big treasure.
      • The other Swiss republics have not.
    • The taste for pageantry and splendid buildings frequently prevails in:
      • the sober senate-house of a little republic
      • the dissipated court of the greatest king

4 The lack of parsimony in peacetime imposes the necessity of contracting debt in wartime.

  • When war comes, the only money in the treasury is the money necessary for the ordinary peace establishment.
    • In war, 3-4 times that expence becomes necessary to defend the state.
      • A revenue 3-4 times greater than the peace revenue is needed.
      • Even if the sovereign can increase his revenue to match this increased expence through taxation, all the added tax proceeds will not come into the treasury until 10 or 12 months after they are imposed.
  • The moment war begins:
    • the army must be increased
    • the fleet must be fitted out
    • the garrisoned towns must be put on defence
    • all of them must be given arms, ammunition, and provisions
  • A big, immediate expence must be incurred in that moment.
    • It will not wait for the gradual and slow returns of the new taxes.
    • In this exigency, government can only turn to borrowing.

5 The same commercial state of society which morally leads government into borrowing, produces in its people an inclination to lend.

  • The commercial state brings with it the need to borrow.
  • It likewise brings with it the facility of lending.

6 A country filled with merchants and manufacturers is full of people who circulate more capitals, as other people’s money or goods, than a private man, who circulates only his own capital through his own income.

  • The private man’s revenue can pass through his hands only once a year.
    • But the merchant’s total capital and credit may pass through the merchant’s hands 2-4 times a year, because his returns are quicker.
  • A country filled with merchants and manufacturers abounds with people who have the power to advance a very large sum to government.
    • Hence the ability of people of a commercial state to lend.

7 Commerce and manufactures can seldom flourish long in any state where:

  • there is no regular administration of justice
  • the people do not feel secure in the possession of their property
  • the faith of contracts is not supported by law
  • the state’s authority is not regularly employed in enforcing the payment of debts

In short, commerce and manufactures can seldom flourish where there is no confidence in the justice of government.

  • The same confidence which disposes great merchants and manufacturers to trust their property to the government’s protection on ordinary occasions, disposes them to trust that government with their property on extraordinary occasions.
    • Lending money to government does not reduce their ability to do their trade and manufactures.
      • On the contrary, it commonly increases it.
  • The state’s necessities render the government willing to borrow on terms extremely advantageous to the lender.
    • Its security to the original creditor is made transferable to any other creditor.
    • Because of the universal confidence in the state’s justice, it sells for more than what was originally paid for it.
  • The merchant or monied man makes money by lending money to government.
    • It increases his trading capital.
    • He generally considers it as a favour when the government admits him to a share in the first subscription for a new loan.
    • Hence the inclination or willingness in the people of a commercial state to lend.

8 Such a government relies on the people’s ability and willingness to lend money on extraordinary occasions.

  • It foresees the facility of borrowing.
  • Therefore, it dispenses itself from the duty of saving.

9 In a rude state of society, there are no great mercantile or manufacturing capitals.

  • Individuals hoard money from a distrust of the justice of government.
    • They fear being plundered once this hoard was discovered.
  • In that case, nobody would be willing to lend to government during exigencies.
    • The sovereign feels that he must save for such exigencies because he knows borrowing would be impossible.

10 The progress of the enormous debts which presently oppress all the great European nations has been pretty uniform.

  • Those debts will probably ruin those nations in the long-run.
  • Nations, like private men, have begun to borrow on personal credit, without assigning or mortgaging any fund for the payment of the debt.
    • When this credit has failed them, they have gone on to borrow on assignments or mortgages of particular funds.

11 The unfunded debt of Great Britain is contracted as a personal credit.

  • It consists partly in:
    • a debt which bears no interest
      • It resembles the debts that a private man contracts on account.
    • a debt which bears interest
      • It resembles the debts that a private man contracts on his promissory note.
  • Extraordinary services are services that are not paid at the time when they are performed.
    • Examples are:
      • those done by the army, navy, and ordnance
      • the arrears of subsidies to foreign princes
      • seamen’s wages, etc.
    • The debts due for such services usually constitute an interest-free debt.
  • Navy and exchequer bills are sometimes issued to pay part of such debts.
    • These bills constitute an interest-bearing debt.
      • Exchequer bills bear interest from the day they are issued.
      • Navy bills bear interest six months after they are issued.
    • To circulate exchequer bills is to receive them at par and pay the interest due on them.
    • The Bank of England enables the government to contract a very large interest-bearing debt:
      • by voluntarily discounting those bills at their current value or
      • by agreeing with government for certain considerations to circulate exchequer bills
        • This keeps up their value and facilitates their circulation.
  • In France there is no central bank.
    • The state bills (billets d’etat) were sometimes sold at 60% and 70% discount.
    • During the great recoinage in King William’s time,  the Bank of England stopped its usual transactions.
      • Exchequer bills and tallies were sold from 25-60% discount.
        • This was partly caused by:
          • the instability of the new government established by the Revolution
          • the lack of the support of the Bank of England

Two Methods of Paying the Debt: Anticipation and Funding

12 When this resource is exhausted and assigning or mortgaging the public revenue is needed to pay the debt, government has had two expedients:

  • Sometimes it made this assignment or mortgage for a short time only, a year or a few years.
    • In this case, the fund was supposed sufficient to pay the principal and interest of the money borrowed, within the limited time.
    • This method was called raising by anticipation.
  • Sometimes it made this payment for perpetuity.
    • In this case, it was supposed sufficient to pay the interest only, or a perpetual annuity equivalent to the interest.
    • Government would be free at any time to redeem this annuity by paying back the principal amount borrowed.
    • This method is called perpetual funding or funding.

13 In Great Britain, the land and malt taxes are regularly anticipated every year by a borrowing clause.

  • This clause is constantly inserted into the acts which impose those taxes.
  • The Bank of England advances to government the total amount of those taxes at 3-8% interest.
    • It receives payment as the taxes come in.
    • Any deficiency is offset by the tax proceeds of the next  year.
  • The only remaining unmortgaged public revenue is thus spent before it comes in.
    • The state constantly borrows from its own agents.
      • It pays interest for the use of its own money.
    • It is like an improvident spendthrift whose immediate needs do not allow him to wait for his regular revenue.

Perpetual Funding

14 In the reign of King William and Queen Anne perpetual funding was not yet familiar.

  • Most of the new taxes were imposed for a short time, from four to seven years only.
  • Most of the yearly grants consisted in loans anticipating the proceeds of those taxes.
  • The proceeds were frequently insufficient for paying the principal and the interest of the money borrowed.
    • It became necessary to prolong the term.

15 In 1697, by the 8th of William III., c. 20, the deficiencies of several taxes were charged on the first general mortgage or fund. [first anticipation]

  • It consisted of a prolongation of several taxes to August 1, 1706.
    • Their proceeds was accumulated into one general fund.
    • The deficiencies charged on this prolonged term was £5,160,459.

16 In 1701, those duties with some others, were further prolonged until August 1, 1710 for the same purposes.

  • This was called the second general mortgage or fund.
  • Its deficiencies were £2,055,999.

17 In 1707, those duties were further prolonged as a fund for new loans to August 1, 1712.

  • It was called the third general mortgage or fund[second anticipation]
  • The sum borrowed on it was £983,254.

18 In 1708, those duties were all further continued as a fund for new loans to August 1, 1714 except for:

  • the Old Subsidy of Tonnage and the Poundage
    • only one part made it into this fund
  • an import duty on Scotch linen which was removed by the Articles of Union

It was called the fourth general mortgage or fund. [third anticipation]

  • The sum borrowed on it was £925,176.

19 In 1709, those duties were all continued to August 1, 1716 except for the Old Subsidy of Tonnage and Poundage which was now all left out of this fund.

  • It was called the fifth general mortgage or fund.
  • The sum borrowed on it was £922,029.

20 In 1710, those duties were again prolonged to August 1, 1720.

  • It was called the sixth general mortgage or fund.
  • The sum borrowed on it was £1,296,552.

21 In 1711, the same duties, with several others, were continued forever.

  • By then, those duties were thus subject to four anticipations.
  • It made a fund which paid the interest of the South Sea Company’s capital. [fourth anticipation]
    • In 1711, that Company loaned £9,177,967 to government.
    • It was the greatest loan ever made at that time.

22 Before this period, the only perpetual debts were the money advanced to government by:

  • the Bank of England
    • The bank fund at this time was £3,375,027.
    • It was paid an annuity or interest of £206,501.
    • The bank fund was at 6% interest.
  • the East India Company
    • The East India fund was £3,200,000.
    • It was paid an annuity or interest of £160,000
    • The East India fund was at 5% interest.
  • what was supposed to be advanced a projected land bank, but was never advanced

23 In 1715, by the 1st of George I., c. 12, the taxes mortgaged for paying the bank annuity were accumulated into one common fund called The Aggregate Fund.

  • It included other taxes which this act also rendered perpetual.
  • It was charged with the payments of the annuities.
  • This fund was then increased by the 3rd of George I., c. 8, and by the 5th of George I., c. 3.
  • The duties added to it were also rendered perpetual.

24 In 1717, by the 3rd of George I., c. 7, several other taxes were rendered perpetual and accumulated into another common fund, called The General Fund.

  • It was for paying certain annuities totalling £724,849.

25 Because of those different acts, most of the taxes which before were only anticipated for a few years were rendered perpetual.

  • It was used as a fund for paying only the interest of the money previously borrowed by successive anticipations.

26 Had money only been raised by anticipation, the public revenue would have been liberated after a few years.

  • It would not need any other government attention besides that of:
    • not charging it with more debt than it could pay within the limited term
    • not anticipating a second time before the expiration of the first anticipation
  • But most European governments have been incapable of those attentions:
    • They have frequently overloaded the fund on the first anticipation, or
    • They have generally taken care to overload it by anticipating a second and a third time before the expiration of the first anticipation.
  • In this way, the fund becomes insufficient to pay the principal and the interest.
    • It became necessary to charge it with only:
      • the interest, or
      • a perpetual annuity equal to the interest
  • Such improvident anticipations gave birth to the more ruinous practice of perpetual funding.
    • This practice puts off the liberation of the public revenue from a fixed period to an indefinite period, never likely to come.
    • However, it raises more money than the old practice of anticipation.
    • When men became familiar with funding, it became universally preferred to anticipation during great state exigencies.
  • Relieving the present exigency is always the object of government.
    • The future liberation of the public revenue they leave to the care of posterity.

27 During the reign of Queen Anne, the market interest rate fell from 6% to 5%.

  • In the 12th year of her reign, 5% was declared the highest lawful rate for money borrowed on private security.
  • Like the creditors of private people, the creditors of the government were induced to accept 5% for the interest of their money after the temporary taxes were rendered perpetual and distributed into the Aggregate, South Sea, and General Funds.
    • It created 1% saving on the capital of most debts funded for perpetuity, or of 1/6 of most of the annuities paid out of those three great funds. [6% market interest – 5% legal interest]
      • This saving left a big surplus in the proceeds of the taxes accumulated into those funds over what was needed for paying their annuities.
        • It laid the foundation for the Sinking Fund.
          • In 1717, it was £323,434.
          • In 1727, the interest of most of the public debts was reduced to 4%.
          • In 1753 and 1757, it was reduced to 3.5-3%.
            • It further increased the sinking fund.

28 A sinking fund is instituted for the payment of old debts.

  • However, it very much facilitates the contracting of new debts.
  • It is a subsidiary fund always at hand to be mortgaged to help any other doubtful fund for a state exigency.
  • I will show gradually whether this sinking fund was more frequently applied to pay old debts or contract new ones.

Words: 2879

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